Tax residence for individuals explained

UNDERSTANDING the concept of tax residence is important for your taxation status in Malaysia and whenever you undertake transactions overseas. Overseas tax authorities and central banks require you to disclose your tax reference number and residency status whenever you need to complete “Know Your Customer” forms for banking and financial institutions. The purpose here is to ascertain your home country of taxation because such information about your financial status is commonly exchanged between countries.

In Malaysia, the principal difference between a resident and non-resident is that the non-residence is taxed at a rate of 30% without being eligible to enjoy any tax reliefs/rebates, whereas a resident is eligible to tiered rates from 0% to 30% and reliefs/rebates.

Determining tax residence

There are four rules to determine tax resident status of an individual in Malaysia.

> In Malaysia in a tax year for 182 days or more

> In Malaysia for less than 182 days but that period is linked by or to another period of 182 days for the tax year immediately preceding or immediately following the particular tax year. For example, if you’re in Malaysia for less than 182 days in 2020, you can be a resident in 2020 provided you are in Malaysia for 182 days or more either in 2019 or 2021, and the link here should be the requirement of your presence at the end of the year and the beginning of the following year.

> In Malaysia for more than 90 days but less than 182 days in a tax year, he can be a resident for that tax year provided he has been in Malaysia for 90 days or more or is a tax resident in the preceding three out of four tax years. For example, in 2020, an individual is here for more than 90 days but less than 182 days, he can be a resident provided he has spent 90 days or more in three of the years between 2016 to 2019 or similarly, if he has been a tax resident in three of the four years, or a mix of both.

> Can be deemed to be a resident despite spending less than 182 days in a tax year. To qualify, he must be a resident in the following year and a resident for the three immediately preceding years. For example, he can be a resident in 2020 despite spending less than 182 days in Malaysia on condition that he will be a tax resident in 2021 and was a tax resident between 2017 to 2019.

Impact of Covid-19

The tax authorities around the world including Malaysia have responded to the Covid travel restrictions by issuing guidance to determine residence.

The Malaysian tax authorities have acknowledged the predicament and responded by issuing guidance stating that temporary presence in Malaysia for non-residents due to the lockdown may not be considered as having presence in Malaysia provided the non-residents can show that they have taken efforts to return to their country of residence and their inability to return was due to the Covid-19 travel restrictions.

Similarly, Malaysian residents who were stranded overseas due to the restrictions imposed by the foreign countries, such temporary absence shall be taken as presence in Malaysia. The Malaysian residents need to provide similar evidence to show that they were unable to travel due to restrictions imposed by the foreign country.

If Malaysian residents were exercising their employment temporarily from an overseas location for the Malaysian employer, such income will continue to be taxed in Malaysia.

However, if the same income is taxed in the foreign country, the Malaysian tax authorities have indicated that they will give a credit relief for the tax paid to the foreign tax authorities provided.

This article was contributed by Thannees Tax Consulting Services Sdn Bhd managing director SM Thanneermalai.